Securities Regulation Daily Republican leaders urge SEC action on proxy plumbing and other issues
Wednesday, February 17, 2021

Republican leaders urge SEC action on proxy plumbing and other issues

By Mark S. Nelson, J.D.

Sen. Pat Toomey (R-Pa) and Rep. Patrick McHenry (R-NC) called on the SEC to rework its rules to accommodate modern technology.

Lawmakers from both sides of the aisle have not been shy about telling the SEC what its priorities should be during the next several years while, at the same time, the SEC awaits confirmation of Gary Gensler as its next chair. In recent days, Democrats have called for action on Rule 10b5-1 plans and Republicans have asked the SEC to halt a Nasdaq rule change proposal that could impose quotas on board membership. Sen. Pat Toomey (R-Pa) and Rep. Patrick McHenry (R-NC), the ranking members of the Senate Banking Committee and the House Financial Services Committee, respectively, have now sent a letter to SEC leaders offering a seven point plan to address a collection of issues affecting capital markets. That seven-point plan can be further reduced to four broader categories: (1) proxy plumbing; (2) clearance and settlement; (3) research analysts; and (4) assorted technical issues centered on the obsolescence of certain technologies and/or modern risks to technology systems.

A press release announcing the ranking members’ letter suggests that they view Acting SEC Chair Allison Herren Lee’s role as limited, specifically referencing her "caretaker" status. "We hope that you will be a steady and effective caretaker of the SEC’s tripartite mission," said Toomey and McHenry. As a practical matter, Lee could not likely move ahead with major rulemakings because of the existing two-two tie between Republican and Democrat commissioners, although it is conceivable that a majority of the four current commissioners could support uncontroversial, yet possibly significant, rulemakings pending Gensler’s confirmation. Gensler’s nomination has been sent by President Biden to the Senate but the Senate Banking Committee has not yet scheduled a nomination hearing.

Proxy plumbing. For one, Toomey and McHenry urged the SEC to revisit the 2010 proxy plumbing concept release and take action to modernize the machinery of the proxy voting process. In recent years, the SEC has addressed other aspects of the proxy process, including the eligibility requirements and resubmission thresholds for shareholder proposals and the regulation of proxy advisers. But the SEC has yet to address the technical processes that underlie the proxy voting system.

Settlement issues. Proxy plumbing may be one of the more complex outstanding issues facing the SEC, but Toomey and McHenry also urge the agency to take on the more recent task of addressing market volatility via further modernization of the clearance and settlement process. Previously, the SEC shortened the settlement process to two days or T+2. However, Toomey and McHenry see room for additional refinements, especially in light of events involving the settlement process related to GameStop stock. GameStop had been the object of a group of traders motivated by Reddit posts who sought to punish hedge funds that had taken short positions in GameStop, resulting in market volatility around GameStop and some other stocks.

The regulation of transfer agents is another area of concern for Toomey and McHenry regarding settlement. The ranking members note that in 2015, then-SEC Chair Mary Jo White had acknowledged the need to address transfer agent regulations but had not moved forward on a proposal. A 2015 combined advance notice of proposed rulemaking, concept release, and request for comment had generated 55 public comments. The ANPR noted that transfer agents provide critical back-office support to capital markets, but that the then-38-year-old SEC regulations had remained virtually untouched since they were adopted despite many changes in the technology used to account for public company shares.

Research analysts. Toomey and McHenry also said the SEC should reconsider its rules for research analysts with an eye to adopting a uniform rulebook. Specifically, the ranking members took issue with the SEC’s application of the 2003 global research analyst settlement, which only included a small number of firms, to nearly all broker-dealers. "We find this development concerning since the terms of this settlement have never been subject to the notice and comment process required by the Administrative Procedure Act," said Toomey and McHenry.

Technology issues. The past year may have been the year of Zoom and Teams due to the pandemic, but Toomey and McHenry would like to see some of the in-person meeting requirements, temporarily suspended by the SEC, go away permanently. The ranking members also would like to see the SEC eliminate "wet" signatures and other requirements for the filing of multiple paper copies.

Toomey and McHenry further recommend that the SEC boost its own information technology capabilities, given that the SEC handles lots of nonpublic data, such as confidential pre-IPO filings and Form PF data. Although the ranking members did not directly mention it, they may also have had in mind the SEC’s prior EDGAR breach and the SEC’s oversight of the Consolidated Audit Trail.

Lastly, Toomey and McHenry urged the SEC to eliminate from its rules mandates for firms to use certain obsolete technologies (e.g., CD-ROM). Moreover, they urged the SEC to reconsider rules that mandate the use of specific private entities (e.g., CUSIP, XBRL, and private market indexes).

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